EXCEPTIONAL LEVERAGE IN THE FOREX MARKET
Leverage is essentially the ability to trade a larger position than the money you actually have on your account. For instance, if you have £10,000 on your account but you are using that capital to control a position with a trade value of £100,000 (that is, 10 times bigger) you have leverage of 10:1.
Leverage gives you the chance to enhance your profit margin, by maximising the return on your capital. With Intertrader you need only put down a proportion of the full contract value (your initial margin requirement) to open a position. The difference between this amount and the contract value is your leverage ratio. On the major forex pairs, professional clients can gain leverage of up to 400:1.
How leverage maximises returns
Say you want to buy GBP/USD and the offer price is currently 1.5000. If you buy £1 per pip with Intertrader your full contract value will be £1 x 15,000 = £15,000. But with our standard leverage for retail clients of 30:1 your margin requirement to open this position is just 3.33% x £15,000 = £499.50.
Another way to look at this is that, if you had £15,000 on your account, you could buy £30 per pip. Without any leverage, your £15,000 could only support a trade worth £1 per pip. With leverage you can increase the potential return on your capital by a factor of 30.
(Note that professional clients have access to lower margin rates with increased leverage. For major forex pairs, professional clients have a standard margin rate of 0.5%, and with a web account can increase leverage further by using stop-loss orders. This is known as order-aware margining. Find out more about becoming a pro client.)
The following table compares trades on the same market with and without leverage, supposing that you buy GBP/USD at 1.5000, and later sell at 1.5054, for a profit of 54 pips.
|Money on account||£15,000||£15,000|
|Risk per point||£30||£1|
|Notional trade size||£450,000||£15,000|
|Increase in pip value||54 pips||54 pips|
Warning: leverage also maximises risk
You should note that, in maximising the return on your capital, leverage also maximises your potential losses. Also, your initial margin requirement does not represent the full amount you might lose on your position should the market move against you.
In the example above, a loss of 20 pips would equal a loss of just £20 without any leverage, but with a ratio of 30:1 this would come to £600. You should always take the risk into account before you open any leveraged forex position.